CITY OF LONDON CHAMBERLAIN’S DEPARTMENT INTERNAL AUDIT SECTION

LONDON COUNCILS GRANTS’ PROGRAMME 2013-15 FINAL REPORT

Date Issued: 12 March 2014

Issued to: John O’Brien, Chief Executive Nick Lester, Corporate Director of Services Stephen Boon, Head of Grants and Community Services Katy Makepeace-Gray, Principal Grants Manager Frank Smith, Director of Corporate Resources David Sanni, Head of Financial Accounting

## CONTENTS (INDEX)

| SECTION | PAGE | |----------------------------------------------|------| | SECTION A: EXECUTIVE SUMMARY | 3 | | SECTION B: AUDIT FINDINGS | 5 | | APPENDIX 1: AUDIT DEFINITIONS AND RESPONSIBILITIES | 10 |

Audit Fieldwork completed 29/01/2014\
Draft Report Issued 03/03/2014\
Management Response Received Agreeing Recommendations 05/03/2014\
Final Report Issued 12/03/2014 SECTION A: EXECUTIVE SUMMARY

Introduction

The 32 London boroughs and the City of London contribute to grants administered by London Councils in accordance with established priorities. The 2013-15 programme subsidises initiatives which aim to reduce homelessness, sexual and domestic violence, unemployment and to support voluntary organisations. The Grants Committee has approved annual expenditure of £9,364,548 across 25 projects for the current grants programme.

The objectives of this audit were:

- To gain assurance that grants are issued in accordance with the established priorities, criteria are universally applied and sufficient due diligence checks are conducted prior to issue
- To verify that internal controls are in place to ensure that grants are being employed for agreed purposes
- To measure the extent of implementation of recommendations agreed in 2012 after the grant investigation
- To determine whether payments are processed accurately, on time and subject to adequate budgetary control

The European Social Fund (ESF) programme (£1,880,200 over two years) is subject to extensive external auditing and has been excluded from the scope of this review. The conclusions of this report refer to controls and processes governing borough-funded activities (priorities 1, 2 and 4).

Assurance Statement

| Assurance Level | Description | |-----------------|-------------| | Substantial | There is a sound control environment with risks to system objectives being reasonably managed. Any deficiencies identified are not cause for major concern. |

Key Conclusions

There has been a notable improvement in the processes and controls of the London Councils’ grants scheme since the previous audit in October 2012. Where appropriate, Internal Audit have conducted 100% sample testing in order to provide greater assurance. The application and shortlisting process prior to the programme’s instigation is fair and transparent. Candidates’ operational and financial eligibility is verified prior to acceptance into the scheme. Formal grant agreements are in place to clearly dictate the terms of the funding and safeguard London Councils’ finances. The returns process is quarterly, clearly documented, consistently applied and it has been evidenced that payments are not processed without submission of the required documentation. Furthermore, all expected payments to date have been processed correctly. On consideration of the high value of some of the grants and the BNRRN issue in 2012, a minor opportunity for improving reference checks has been recommended. The introduction of a second reference check for organisations which have not been funded by London Councils before, or for those awarded over £1 million per year, should be considered to further manage the risk of adverse performance issues during future grants programmes.

| Recommendations | Red | Amber | Green | Total | |-----------------|-----|-------|-------|-------| | Number Made: | 0 | 0 | 1 | 1 | | Number Accepted:| 0 | 0 | 1 | 1 | SECTION B: AUDIT FINDINGS

Application and Eligibility

Establishing priorities Internal Audit verified that the four priorities for the 2013-15 grants programme are the result of extensive public consultation. It is noted that members were consulted on the drafted priorities in May 2012 and all beneficiaries have demonstrated adherence to one of the priorities.

Verification of applicants' eligibility The application and assessment process includes a satisfactory scope of financial, operational and third party checks: including an evaluation of recent financial statements; application of appropriate financial ratios; and consideration of project scope and performance history. These criteria are consistently applied in order to effectively determine candidates' eligibility, and obtain sufficient assurance that the key risks of poor performance or financial loss are managed. The scoring matrix is universally employed and the scores were reported to the Grants Committee in February 2013, on which officers' recommendations for funding were based. These scores were accurately calculated using the scoring matrix.

An independent check of officers' financial ratios was conducted by using financial information published by the recipients on either their own websites or the Charity Commission. Audit calculations, based on a random sample of five successful candidates, verified that London Councils' financial viability checks were accurate.

In accordance with internal policy, the Grants and Community Services section undertook references checks for all successful candidates prior to funding. The scope of the questions, using a pro forma, is considered sufficient to constitute a robust reference check.

However, London Councils may benefit from the greater assurance afforded by an additional reference check, considering the value of the grants (up to £2.7 million over two years) and the BNRRN issue in 2012. In order to limit the affect this could have on resources, an additional check could be applied to the highest risk grants: for organisations who have not previously received funding from London Councils or who receive in excess of £1 million per year from the scheme.

Grant agreements Internal Audit verified that all current grants for non-ESF priorities are supported by formal grant agreements between London Councils and the beneficiaries. London Councils maintains a record of all agreements in the event of legal dispute, which have been signed by the Director of Corporate Services and a senior representative of the recipient organisation. The grant amounts stipulated within the contracts reconcile to the figures approved by the Grants Committee and those published on the website. Priority | Issue | Risk --- | --- | --- Green | Only one reference is obtained for each candidate | Poor performance of recipients not identified prior to funding

Recommendation 1: The Grants section should consider introducing a policy of more than one reference check per candidate. In order to limit the impact on staff resources, this could be exclusively applied to organisations which receive over £1 million or have no history of London Councils’ funding.

Management Response and Action Plan Flow charts are currently being developed for the application process. A requirement of two references for organisations with a recommended funding level of over £1 million or have no history of London Councils’ funding has been added.

Responsibility: Head of Grants and Community Services Target Implementation Date: April 2014

Monitoring

Mid-programme returns The Grants section operates a policy of quarterly returns, on which instalments of funding are predicated, in order to suitably monitor the beneficiaries’ performance. Returns constitute databases, progress reports and case studies which provide an adequate range of data to inform London Councils’ decision to continue funding during the grants programme. All returns were verified to be up to date at the time of review and submitted in the format required by London Councils.

An evaluation of a sample of returns for the period July to September 2013, officers’ calculations concerning red, amber and green ratings on organisation’s performance and quarterly update reports submitted to committee verified that all issues identified by returns to date have been fully and clearly reported to the Grants Committee. RAG ratings are accurately and consistently employed and are calculated using a variety of appropriate factors with suitable weighting.

Visits A formal policy for the scope and frequency of visits is maintained by the Grants section. Observation of visit notes available to date confirmed that visits are recorded, using the required templates, and that the number of visits undertaken at the time of fieldwork was in accordance with the policy of two visits per year. Visits incorporate a sufficient range of evidence and questioning, including verification of performance indicators, financial performance and governance structure. Termination of funding As at January 2014, no funding had been terminated. However, Internal Audit is satisfied that controls are in place to support prompt termination of grants should this become necessary. Assurance has been placed on a number of factors which are all considered sufficient to allow prompt termination should this become necessary: the reporting framework from grant officers to managers; formal reporting to committee; the frequency and scope of returns; and officer visits. Evidence of London Councils delaying payments until recipients have submitted required documentation demonstrates a notable improvement in payment control since the BNRRN issue (further information under ‘Payments’ section).

No recommendations raised.

Payments Quarterly payments to date Internal Audit can provide assurance that all due payments to date have been processed at the time of the review. A reconciliation between the total grant value approved by the Grants’ Committee in February 2013 and payments to date identified no variance, as summarised below:

Table One: Approved budget against actual expenditure as at January 2014

| Priority | Annual budget 2014/15 | Predicted expenditure 2014/15 | Actual expenditure 2014/15 | |----------|-----------------------|------------------------------|---------------------------| | | Approved by committee, July 2013 | Interpolation of annual budget | Quarters 1 and 2 | | 1.1 | £1,889,936 | £944,968 | £944,968 | | 1.2 | £730,672 | £365,336 | £365,336 | | 1.3 | £149,535 | £74,768 | £74,768 | | 2.1 | £199,865 | £99,933 | £99,933 | | 2.2 | £1,715,504 | £857,752 | £857,752 | | 2.3 | £250,038 | £125,019 | £125,019 | | 2.4 | £612,950 | £306,475 | £306,475 | | 2.5 | £304,000 | £152,000 | £152,000 | | \*2.6 | £320,633 | £160,317 | £160,317 | | 4 | £1,331,848 | £665,924 | £665,924 | | **Total**| **7,504,981** | **3,752,491** | **3,752,491** |

\*Including funding for DVIP, which was approved by a majority vote in July 2013

Notable variances between the expected and actual payment dates were identified, however, particularly for the six months of the programme (April – September). Analysis of correspondence between London Councils and the organisations which received the most delayed payments (up to 99 days) verified that the delays are owing to the beneficiaries failing to submit relevant documentation within the required deadlines. Examples include revised signed partnerships or safeguarding policies, delivery plans, public employer's liability insurance and draft accounts. In these instances, London Councils has delayed funding pursuant to clause 6, section 1 of the grant agreements. On receipt of the required documents, the Grants section processed the payments within reasonable timeframes of two working weeks.

Table Two: Summary of payment delays by quarter

| | Q1 | Q2 | Q3 | |----------------|----|----|----| | Average delay (days) | 51 | 32 | 13 | | Shortest delay (days) | 28 | 11 | 7 | | Longest delay (days) | 63 | 99 | 19 | | >30 days (# payments) | 24/25 | 13/25 | 0/25 |

**Budgetary control**

Payments are subject to satisfactory control and are scheduled in accordance with the final annual budget approved by the Grants' Committee on the local system, GIFTS. Responsibility for administering payments is adequately segregated in line with best practice: grant officers check claims and schedule the payments on GIFTS, which are processed subject to the Principal Grant Managers' authorisation checking and sign off for payment by the finance team.

The Director of Resources checks the budget position on a monthly basis in order to allow prompt identification of any resourcing issues and calculates the end of year forecast on a quarterly basis, which members receive periodic updates on. The Head of Financial Accounting is responsible for conducting quarterly reconciliations between the City of London's finance system, CBIS, and GIFTS. It has been noted that reconciliations are conducted frequently and no unresolved variances have been identified since the start of the current grants programme.

The grants' programme budget for 2013-15 is in a favourable position, reporting 44% of total expenditure against budget and 45% of income (representing a surplus of £124,000) at the six month position owing to a return to revenue of estimated liabilities set up during the closure of the 2012/13 accounts (£71,272) and a net underspend prediction for the ESF results-based programme.

No recommendations raised. Implementation of grant investigation recommendations

Internal Audit has reviewed the implementation of recommendations agreed with London Councils in October 2012 following an investigation of the Black Neighbourhood Renewal and Regeneration Network (BNRRN) irregularity. All seven recommendations are considered fully implemented. It should be noted that recommendations concerning the escalation or reporting of financial irregularities have been considered implemented based on evidence of a new whistleblowing and anti-fraud policy and a robust reporting framework; there have been no reports of misappropriation in the 2013-15 programme at the time of reporting.

A table summarising the implementation of recommendations at the time of reporting is presented below:

Table Three: Summary of Progress

| RAG Rating | Recommendations | Implemented | Partially Implemented | Not Implemented | |------------|-----------------|-------------|-----------------------|-----------------| | Red | 0 | 0 | 0 | 0 | | Amber | 2 | 2 | 0 | 0 | | Green | 5 | 5 | 0 | 0 | | Total | 7 | 7 | 0 | 0 |

No further recommendations raised.

## APPENDIX 1: AUDIT DEFINITIONS AND RESPONSIBILITIES

### Assurance levels

| Category | Definition | |---------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | **Nil Assurance ‘Dark Red’** | There are fundamental weaknesses in the control environment which jeopardise the achievement of system objectives and could lead to significant risk of error, fraud, loss or reputational damage being suffered. | | **Limited Assurance ‘Red’** | There are a number of significant control weaknesses and/or a lack of compliance which could put the achievement of system objectives at risk and result in error, fraud, loss or reputational damage. | | **Moderate Assurance ‘Amber’** | An adequate control framework is in place but there are weaknesses and/or a lack of compliance which may put some system objectives at risk. | | **Substantial Assurance ‘Green’** | There is a sound control environment with risks to system objectives being reasonably managed. Any deficiencies identified are not cause for major concern. |

### Recommendation Categorisations

| Priority | Definition | Timescale for taking action | |----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------| | **Red - 1** | A serious issue for the attention of senior management and reporting to the appropriate Committee Chairman. Action should be initiated immediately to manage risk to an acceptable level | Less than 1 month or more urgently as appropriate | | **Amber - 2** | A key issue where management action is required to manage exposure to significant risks, action should be initiated quickly to mitigate the risk. | Less than 3 months | | **Green - 3** | An issue where action is desirable and should help to strengthen the overall control environment and mitigate risk. | Less than 6 months |

Note: These ‘overall assurance level’ and ‘recommendation risk ratings’ will be based upon auditor judgement at the conclusion of auditor fieldwork. They can be adjusted downwards where clear additional audit evidence is provided by management of controls operating up until the point of issuing the draft report. What Happens Now?

The final report is distributed to the relevant Head of Department, relevant Heads of Service, and those involved with discharging the recommended action.

A synopsis of the audit report is provided to the Audit Committee. Internal audit will carry out a follow-up exercise approximately six months after the issue of the final audit report. The on-going progress in implementing each recommendation is reported to each meeting of the Audit Committee.

Any Questions?

If you have any questions about the audit report or any aspect of the audit process please contact the auditor responsible for the review (Myles Binney, Myles.Binney@cityoflondon.gov.uk) or Paul Nagle, Head of Audit & Risk Management at paul.nagle@cityoflondon.gov.uk. APPENDIX 2: CLIENT FEEDBACK

The Internal Audit Section is continually monitoring and striving to improve its methods of operation, with the aim of giving you a better service. Part of this involves obtaining your opinion on individual audits.

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